Market Forecast For the Week of May 15, 2023: Realists Look For The Copper Lining As The Bulls Vainly Try Again To Break Resistance

FORECAST: The S&P 500 continues to grind higher toward resistance at 4210 as growing fears of low global growth paradoxically make mega-cap equities the most attractive place to park capital along with US Treasuries. The bearish case to discard the above is too profound to allow the index to rocket higher, so the slow desultory grind continues as investors ignore balance sheet trends in the hopes for a post-pandemic world that feels just as full of hope as the pre-pandemic world. Bear markets are full of such jejune optimism.

Cultural and geopolitical trends make the post-COVID world much riskier and less progressive than before. Balance sheets at both the corporate and sovereign levels reflect this reality more so than financially engineered earnings per share reports. Corporations have a harder time growing inflation-adjusted earnings precisely because of cultural-political changes that have vitiated the supply chain and labor markets. Nation-states are growing indebted beyond previous ceilings at precisely the time short-term global benchmark interest rates are rising. The debt-ceiling impasse is a harbinger of deeper political fights as interest expenditures on refinanced debt increasingly crowds out discretionary spending. The financial corollary to this dismal political future is a return to the October lows in the S&P 500 as earnings fail to meet expectations and call into doubt high valuations based on 2024-2025 earnings.

Key to watch is the action in oil and key industrial metals. I expect WTI oil to consolidate just under the $70 region without breaking last week’s lows, charging the bulls to make the final test of resistance levels. But a break before $65 would confirm the action in metals and portend lower lows in the S&P before the bulls can regroup for another shot at 4210. In both cases, however, the stage is set for an eventual retest not of the 2022 highs but its lows, as high interest rates, noxious politics and eventual recession smash expectations for a rosy 2024.

My current positions include a moderately large cash position, 3M (MMM), Pfizer (PFE), the levered ETF UPRO and inverse levered ETF SPXU, all of which net out to a significant long position in large-cap equities.